Power play: How a small co-op wants to open Nevada's electricity market and own it

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The headquarters for the Valley Electric Association sits off a main highway with billboards advertising the casinos of Pahrump, Nev., a small desert outpost about 60 miles from Las Vegas. As with many rural electric cooperatives, VEA was formed in the 1960s to electrify an expansive but sparsely-populated area unserved by the region’s big utility, the Nevada Power Company.

Today the Nevada Power Company is NV Energy, and it is the 800-pound gorilla in the Nevada market. It owns about $3 billion in generation assets, in addition to dozens of power contracts. It serves more than 1.2 million customers spread across a 46,000 square-mile service territory that includes Las Vegas and Reno, Nevada’s urban centers. It has more than 2,500 employees.

By contrast, VEA owns no generation assets. And from its unassuming headquarters in Pahrump, it serves about 45,000 customers over a 6,800 square-mile stretch of desert east of Death Valley.

But it has its sights on NV Energy’s service territory.

In a recent filing, it asked utility regulators for permission to sell electricity to large businesses that defect from NV Energy. Under legislation passed after the 2000-2001 Western energy crisis, multiple casinos and data centers have left the utility to buy power from other providers. Through a subsidiary, VEA wants to be a provider of wholesale electricity for commercial customers.

It’s also pushing for the Energy Choice Initiative. The ballot measure to restructure Nevada’s market, if approved again in 2018, would give all customers the ability to select their power provider. VEA sees an opportunity in being a retail provider, and it wants to be the largest one.

“If energy choice becomes a reality in the state of Nevada, our goal is to become the largest energy service provider in the state,” said VEA CEO Tom Husted one Friday in October.

Analysts differ on VEA’s prospects for success, but no one denies Husted’s ambition.

Conductor of the orchestra

VEA is an outlier among co-ops.

In the past, rural co-ops have resisted retail competition. Given their small size, co-ops can be particularly vulnerable to extensive market changes. During the first wave of restructuring in the mid-1990s, the National Rural Electric Cooperative Association opposed retail choice (the trade group is working on a report revisiting the issue). When Texas restructured its power market, it excluded co-ops but gave them the ability to opt into competitive markets. Only one co-op did.

Even back in the late-1990s, when Nevada lawmakers first flirted with retail competition, VEA embraced it. It was around that time that VEA and the Nevada Rural Electric Association ended their relationship. The trade group for co-ops in Nevada and California hasn’t taken a position on the state’s current Energy Choice Initiative, but it doesn’t see its members as retail providers.

Most rural electric cooperatives in Nevada are watching the Energy Choice Initiative from afar. These rural co-ops own few generation assets, if any, and procure power, which they then distribute within their service territory. In this way, the Nevada Rural Electric Association’s executive director sees his members as customers buying power in the market, not as vendors.

“We see our role in the future, not as a dictator (in) this very regulated, vertically-integrated industry, but more as the conductor of the orchestra,”

Tom Husted

CEO, Valley Electric Association

“We consider ourselves buyers,” said James Wadhams, the group’s attorney.

VEA wants to flip that paradigm with an ambition that has raised more than a few eyebrows.

Over coffee in his office in October, Husted, VEA’s CEO, argued that technologies, including distributed generation, are giving customers large and small (including co-op members) more options to manage their energy. As a result, it is splintering the old, top-down utility model. People want choice, Husted said, and VEA sees a way to increase its business by offering it.

“We see our role in the future, not as a dictator (in) this very regulated, vertically-integrated industry, but more as the conductor of the orchestra,” Husted said. “You may be buying power from us in one hour and selling it to us in the next hour. What we’re doing is managing that.”

An opening for a subsidiary

After the Western energy crisis, Nevada lawmakers mostly abandoned plans for a restructured market, with one significant exception. The legislature kept energy choice for large businesses.

The loophole gave large consumers a regulatory pathway to procure power without NV Energy. Companies with a load of at least 1 megawatt could defect if they paid impact fees and received regulatory approval. Once done, a firm other than NV Energy could sell them power. Starting in 2014, several large companies began looking at the measure as a way to leave NV Energy — a move that could help them tap into low natural gas prices and boost their renewable bona fides.

That year, data storage company Switch applied to bypass NV Energy and purchase power on its own. Within the next two years, two of the largest casino operators on the Las Vegas Strip — about 6 percent of the utility’s load — would exit. They represented a big slice of NV Energy’s customer base at a time when the utility was fighting another battle with rooftop solar providers.

MGM and Wynn Resorts now take power from Tenaska Power Services and Exelon.

“It is a big deal for a utility to lose customers if your rates are designed such that the less sales, the less money you make,” said Rebecca Wagner, a former Nevada regulator and consultant.

VEA saw an opening here, too.

In 2014, VEA formed a wholly-owned subsidiary, Valley Electric Energy Services. According to a recent regulatory filing, VEES attorneys said the LLC “was formed as a competitive energy provider with the intent that it would engage in the business of wholesale and retail electric sales, both within and without the state of Nevada, in compliance with state and federal laws.”

More businesses are looking to leave NV Energy, and VEES wants to be their Tenaska.

In the September filing with the Public Utilities Commission of Nevada, VEES asked regulators for a declaratory order that answered this question: Could VEES, a subsidiary of a co-op, sell energy to a company that applied to leave NV Energy? The way Husted sees it, VEES is not in direct competition with NV Energy. It is “competing with the rest of the world.”

VEA vs. NV Energy: Decades of tension

For decades, VEA and NV Energy have clashed over service territories.

In 2012, VEA won big contracts to provide electrical services to the Nevada National Security Site, a nuclear research test site, and Creech Air Force Base, a hub for military drone operations.

NV Energy filed complaints with the PUC on both matters. In one complaint, it alleged that VEA was violating its exclusive service territory by operating Creech’s distribution system.

In another complaint, it alleged that the nuclear test site needed to pay an exit fee to take retail power from VEA. Jurisdiction over the test site had long been a flashpoint for VEA and NV Energy, with litigation going back to the 1990s. Since the 1950s, the site had purchased power from NV Energy. In 2012, it switched to VEA, which would put it in CAISO’s balancing authority.

The PUC denied the petitions.

By 2014, both claims had been settled. In January 2014, VEA told a local paper, the Pahrump Valley Times, that its relationship had “improved significantly as a result of NV Energy’s recent merger with MidAmerican Energy Holdings Company [now Berkshire Hathaway Energy].”

A spokesperson for NV Energy declined to comment on VEA’s current plans.

NV Energy had said publicly that it would remain neutral on the state’s renewed effort to expand retail choice to all customers. But in a recent interview with the Nevada Independent, NV Energy CEO Paul Caudill said it’s becoming “increasingly difficult to maintain that position.”

NV Energy assumed an even more assertive stance in a December filing, when it summed up the stakes like this: “Nevadans thus face a critical choice – to abandon the system that has provided a reliable and low-cost service that is essential to the health, safety and welfare of Nevadans, or undertake an undefined and risky experiment with a key input to the State’s economy.”

If the state moves forward with restructuring, NV Energy will become a wires-only company. Caudill said it had no interest getting into the merchant business or being provider of last resort.

Where are the other co-ops?

Rural electric co-ops regularly form subsidiaries that reach customers beyond their service territories. These subsidiaries will offer a range of services, from broadband to propane.

VEA’s decision to offer electricity to customers outside of its territory is rare. A spokesperson for the National Rural Electric Cooperative Association said to the organization’s knowledge, “VEA’s venture is unique among co-ops.” There are nearly 900 electric co-ops in the U.S.

“It’s unusual for a co-op to enter that segment, and the reason is co-ops tend to be as conservative as they come in terms of risks and opportunities,” said Ned Ross, who leads government affairs at Direct Energy, one of the largest retail energy providers in Texas.

“This is someone who is saying, ‘We are either the sledgehammer or the wall. And we are putting our best effort into becoming the sledgehammer in that equation.’”

Andrew Johnston

Director, Global Energy Practice, Navigant

Ross, is pushing to open Nevada’s market as part of the Retail Energy Supply Association, which represents big industry players like NRG and Constellation. He said the group would welcome VEES as a participant. Ross added that from his experience, it is less complex to provide energy to large businesses than to residential consumers because of additional rules.

“What I would caution them about is the complexity of the retail market,” Ross said. “It's a very complex, very heavily regulated, very politicized part of the business.”

Andrew Johnston, a director in Navigant’s global energy practice, applauded VEA’s effort to evolve with industry changes. He said other co-ops are watching and are “cautiously optimistic.”

“This is someone who is saying, ‘We are either the sledgehammer or the wall. And we are putting our best effort into becoming the sledgehammer in that equation,’” Johnston said.

Other co-ops have formed creative subsidiaries, Johnston said, citing Bandera Electric Cooperative, a central Texas provider whose solar company was selected to build out a microgrid project in Liberia. But he suspected that other rural co-ops have not created an electricity subsidiary because they would face stiff competition from bigger players.

“They don’t want to be squashed by a state-level lobbyist or an industry titan,” he said. “It's a very complex, very heavily regulated, very politicized part of the business.”

More than 70 percent of Nevada’s voters approved the Energy Choice Initiative in 2016. Since the ballot measure would amend Nevada’s constitution, it will appear on the ballot again in 2018.

Jon Wellinghoff, a former chairman of the Federal Energy Regulatory Commission and a policy consultant for the Energy Choice Initiative, said he could see VEA being competitive if Nevada restructures its market. He said it was a logical move for VEA, which already has expertise in buying energy services and the infrastructure that goes into billing and serving customers. He asked: “Why not use it for the purpose of providing services outside of your service territory?”

Others worry about a conflict between the co-op and its subsidiary.

Wagner, the former utility regulator, called VEA’s plan ambitious but expressed concerns about conflicts of interest. “It’s an interesting concept, but I don’t think it’s fully baked,” she said.

Questions about governance

In late November, the PUC held a hearing to explore issues around the subsidiary’s governance.

The Nevada Rural Electric Association had raised concerns that if VEES was not managed separately from VEA, cooperative members could be liable in the case that VEES flopped.

“It’s incumbent upon the regulator to ensure that they are not only legally separate but in fact and in operation separate,” said Wadhams, who appeared at the hearing as the association’s attorney.

His concern is that any misstep with VEA’s venture could taint the rest of Nevada’s co-ops and expose them to more regulation. The Nevada PUC only has limited oversight of state co-ops.

Husted emphasized that the entities would be legally separate.

“Just because Valley Electric Association has utility operations with a mandated service area, that does not mean it’s restricted from selling nectarines in North Las Vegas,” he said. “It can’t operate its utility operations outside of its mandated service area. But it can do other business outside of its service area as long as it meets with the legal structure of that organization.”

The PUC has not released an opinion on the VEES docket.

But the PUC staff, which advises the utility commissioners, argued in a recent filing that “by virtue of it being a distinct and separate legal entity from VEA, [VEES] is not precluded from being a provider” to companies looking to exit NV Energy. NV Energy has not intervened.

At the hearing, a PUC commissioner asked if there had been any conversation with NV Energy. A VEES lawyer said he was “not aware of any communications,” according to the transcript.

The potential for renewables

Like many co-ops, VEA does not own generation.

It procures its electricity from hydropower off the Hoover Dam, power purchase agreements and the wholesale market (it was the first out-of-state utility to join CAISO). VEA would likely be unable to use its Hoover Dam power for the new venture because it was allocated for the use of a rural co-op. It would also not likely have access to the low-interest financing available to co-ops.

VEES would be a separate entity, leaving questions about where its power would come from.

Husted said the answer belongs to its customers.

“It depends on the wishes and desires of the potential consumer,” Husted said. “If they want to put in renewable assets — steel in the ground — we’re capable of doing that.”

Husted noted significant potential for solar development near Valley Electric’s headquarters. The areas surrounding Pahrump are vast deserts, stretches of sun-soaked land ripe for solar arrays.

“Valley Electric’s service territory has huge potential for renewable generation,” he said. “We can work … within our area and expand renewable generation here for export within the state.”